Last night the Danish government became the fourth European country to announce that it would guarantee all deposits in Danish banks. Last week, the Irish government promised to protect all retail, commercial and inter-bank deposits, as well as senior debt, which caused investors to flock to Irish banks. The Greek government has made a similar pledge.
Chancellor Merkel's move followed an emergency meeting with the German central bank and financial regulator, which ended last night with a €50bn (£38.8bn) to save the country's second biggest mortgage lender, Hypo Real Estate. A ministry statement said that the deal would add up to €15 billion in credit to an earlier plan worth €35 billion. Under the original plan, the German government would have injected £27bn into Hypo Real Estate and banks would have provided the rest.
But that deal fell apart yesterday and German MPs and bankers spent today devising a more aggressive solution.
A statement last night said the plan would assure Hypo's solvency and "strengthen the financial community of Germany in difficult times".
Elsewhere, it was announced that French banking giant BNP Paribas will take a majority 75 per cent share of troubled bank Fortis.
The deal came after two days of closed-door talks between the Paris-based bank, Fortis and government authorities in an effort to restore confidence in the company before markets opened tomorrow.
"No client or depositor [at Fortis] will end up in problems due to the financial crisis," Belgian Prime Minister Yves Leterme said after two days of closed-door talks between BNP Paribas and government officials.
A previous bail-out last week, which left Belgium and Luxembourg with 49 per cent share stakes each in Fortis, failed to quell widespread concerns over the bank's solvency.
Under the deal, the Belgian government will buy all remaining shares in Fortis Belgium for about €4.6bn and then sell 75 per cent of its stake to BNP Paribas for €8.3 billion in turn for a blocking 11.7 per cent minority share in BNP Paribas. Luxembourg will get a 1.4 per cent share in BNP.
Mr Leterme said the minority stakes in BNP would also ensure the government could ensure the French bank did not move to cut jobs at Fortis. The bank currently employs 25,000 in Belgium.
Officials in Iceland were also in talks to shore up its banking system.
The German decision to guarantee savings will increase the likelihood that Britain and other European governments will follow suit. Yesterday, the Chancellor, Alistair Darling, said the Government was ready to assist banks which get into difficulties. In a television interview, he said he was willing to take "some pretty big steps" to stabilise the banking system.
Ms Merkel said that Germans will not lose a single euro of their savings because of the crisis. "We tell all savings account holders that your deposits are safe. The federal government assures it," she said.
Until now, private savings accounts, including the accounts of small, privately held companies, have been guaranteed by 180 banks in Germany. The guarantees of the banks covered 90 per cent of an account's balance to a maximum of €20,000.
Commentators suggested last night that Germany's decision was an indication of how fragile its banks had become. Conservative estimates about the level of private German savings were put at some €400bn.
Mrs Merkel's move appeared also designed to counter deep seated German fears about financial collapse that stemmed from the Weimar Republic years in the late 1920s and early 1930s and ultimately led to the rise of Adolf Hitler's Nazi Party.
Peer Steinbrück, the German Finace Minister admitted yesterday that he was "appalled" that the problems at Hypo Real Estate had not been disclosed earlier. The German government had pledged to come up with the largest share of the rescue package with a consortium of banks providing the remaining €8.5bn.
The governments of Belgium, France and Luxembourg have agreed to inject €6.4bn into the troubled Franco-Belgian bank Dexia, which has links to Hypo Real Estate.
Meanwhile the chairman of Kaupthing, Iceland's biggest bank, defended its financial position after speculation about its future. Sigurdur Einarsson said: "Over the years we have built a strong and well-diversified bank – Kaupthing has a great franchise. We've got good asset quality and a highly diversified loan portfolio. In fact, 70 per cent of our business is outside Iceland."
Kaupthing counts among its clients the property tycoon Robert Tchenguiz and the Candy brothers, the developers of luxury homes. The Icelandic investor Baugur used loans from Kaupthing to fund some of its retail investments in the UK.
The tumultuous events of the weekend in Europe followed the eventual approval of the US government's $700bn bailout package by Congress.